Posts Tagged ‘Loan Modification’

Here is how it works: years ago, when home values were at their height, home owners used the equity in their home(s) to borrow against. They took out second mortgages, third mortgages, and even fourth mortgages. Those mortgages were secured by the equity in the home. But today, one in four California homeowners is upside down (where the liens against a property exceed the value of the property). In many cases, debtors can completely eliminate junior liens either in a Chapter 13 or Chapter 11 Bankruptcy!

For most individuals and families, eliminating their junior mortgages and creating an affordable three to five year repayment plan on their debt is better than anything possibly achieved through a loan modification. Consumers are able to get caught up on delinquent mortgage payments and eliminate their junior mortgages upon the completion of their Chapter 11 or 13 plan. Consumers then walk away from their plan, free of all unsecured debts and their second mortgages in some cases. It truly represents a fresh start.

The great news is that by using this plan, it is possible to stay in your home while paying only a percentage of your unsecured debt even though you may be making less than you did several years ago.

The only shame is that most people who qualify for this type of bankruptcy don’t even know it exists!

In California, consumer bankruptcies rose 25% in 2010 and were up 9% nationwide. There were 24,117 consumer bankruptcy filings here in the Santa Ana division of the Central District of California…and that was just in the first quarter of 2010! The majority of those were Chapter 7 filings to liquidate assets and eliminate unsecured debts.

What should be of great interest, especially here in South Orange County is the growth seen in Chapter 13 and consumer Chapter 11 bankruptcy filings. In both of these, the consumers typically are able to keep their homes, eliminate their junior mortgages (i.e. 2nd, 3rd, and 4th mortgages) entirely, and even reduce the amount owed on other secured debts. When an individual does not qualify for Chapter 13, they often consider a Chapter 11 bankruptcy. For example, if a debtor’s secured debt exceeds $1,081,000 and/or combined unsecured debt exceeds $360,475, and the debtor wishes to keep delinquent assets, the only viable bankruptcy recourse would be to file for Chapter 11 bankruptcy protection.

In California, consumer bankruptcies rose 25% in 2010 and were up 9% nationwide. There were 24,117 consumer bankruptcy filings here in the Santa Ana division of the Central District of California…and that was just in the first quarter of 2010! The majority of those were Chapter 7 filings to liquidate assets and eliminate unsecured debts.

What should be of great interest, especially here in South Orange County is the growth seen in Chapter 13 and consumer Chapter 11 bankruptcy filings. In both of these, the consumers typically are able to keep their homes, eliminate their junior mortgages (i.e. 2nd, 3rd, and 4th mortgages) entirely, and even reduce the amount owed on other secured debts. When an individual does not qualify for Chapter 13, they often consider a Chapter 11 bankruptcy. For example, if a debtor’s secured debt exceeds $1,081,000 and/or combined unsecured debt exceeds $360,475, and the debtor wishes to keep delinquent assets, the only viable bankruptcy recourse would be to file for Chapter 11 bankruptcy protection.

Here is how it works: years ago, when home values were at their height, home owners used the equity in their home(s) to borrow against. They took out second mortgages, third mortgages, and even fourth mortgages. Those mortgages were secured by the equity in the home. But today, one in four California homeowners is upside down (where the liens against a property exceed the value of the property). In many cases, debtors can completely eliminate junior liens either in a Chapter 13 or Chapter 11 Bankruptcy!

For most individuals and families, eliminating their junior mortgages and creating an affordable three to five year repayment plan on their debt is better than anything possibly achieved through a loan modification. Consumers are able to get caught up on delinquent mortgage payments and eliminate their junior mortgages upon the completion of their Chapter 11 or 13 plan. Consumers then walk away from their plan, free of all unsecured debts and their second mortgages in some cases. It truly represents a fresh start.

The great news is that by using this plan, it is possible to stay in your home while paying only a percentage of your unsecured debt even though you may be making less than you did several years ago.

The only shame is that most people who qualify for this type of bankruptcy don’t even know it exists!

Stephen Doan is a partner in the San Clemente based Doan Law Firm, a father-and-five-son law practice founded on Judeo-Christian principles that strives to treat every client with unfailing honesty and compassion. Considered among the best in the nation, Doan Law Firm is California’s Largest Family of Attorneys and helps families every day improve their financial health. For more information, call 888-DOAN-LAW (888-362-6529) or visit www.DoanLawFirm.com

The process of loan modification closely resembles the Wild West. There’s a sheriff in town, but he’s likely hiding behind an overturned stagecoach when the real shooting begins. For the myriad of people engaged in discussions, discussions and more discussions with their lenders, it’s hard to get the timing of the loan modification and bankruptcy in sync.

Ideally a loan modification should be complete before filing either Chapter 7 or Chapter 13 bankruptcy, but when stuck in endless rounds of paperwork coupled with the glacial pace of most banks, often the bankruptcy becomes pressing as other creditors actively pursue lawsuits, wage garnishments and liens.

Have no fear, there’s a new sheriff in town. If you’ve filed bankruptcy, all is not lost on the loan modification front. You are still free to enter into an agreement with your mortgage company as your bankruptcy progresses to discharge. (*specific Chapter 13 information).

More good news from the land of tumbleweeds; all is not lost if the bankruptcy is completed before the loan modification. Once on the other side of bankruptcy, armed with a discharge of your debts, your debt to income ratio for the purposes of determining whether you qualify for a loan modification is much improved. Many Los Angeles and Orange County bankruptcy clients find they get more favorable loan modifications after the bankruptcy than were in the works before.

* In a Chapter 13, once a loan modification is negotiated, it must be approved by the court and the Chapter 13 Trustee. The Trustee may demand that if the loan modification results in a lower payment, that difference be added into the Chapter 13 plan payment as excess income. The Trustee may reject the loan modification if it would increase the monthly mortgage payment and debtors wish to lower their plan payment to make the payments (which, from the Trustee’s point of view leaves less for unsecured creditors like credit cards).

Note that the above does not apply to instances where the creditor of a property has been granted relief from the automatic stay by the court. In those instances, the property is removed from the bankruptcy estate. This usually occurs when the debtors have defaulted on a mortgage payment after the bankruptcy has been filed. With the estate removed from bankruptcy, some mortgage creditors have expressed willingness to work out some arrangement outside the bankruptcy court if they believe the default is not a future concern.

Q: I was reading in the newspaper that when you file for a chapter 13, you can also request to modify your 1st mortgage to the current value of the house. Is this correct?

A: The bankruptcy code specifically prohibits modification of a mortgage on a primary residence. A mortgage on a secondary residence may be modified. The way the modification works is that the court may “cram-down” the principal amount of a mortgage on a property to its market value. However, the court’s ability to do this only lasts for the duration of the bankruptcy so the entire market value of the home must be paid during the course of the bankruptcy so that the court may “finalize” the loan modification before the bankruptcy ends. It is based on the same code provisions that allow a bankruptcy court to determine that secondary (and tertiary, etc) trust deeds on a property are completely unsecured by any residual value in a property after considering the first trust deed (primary mortgage) and current fair market value, which results in the court’s ability to grant the lien strips.

Thus, if the “non-primary residence” property has a market value of $200K, then you must pay $200K in the course of about 3-5 years (i.e. about $3,667 per month) in addition to any other amounts required by your bankruptcy plan. In addition, depending on your county, the Trustee may decide not to let this come at the expense of your unsecured creditors… therefore it effectively cannot be your own money that pays this monthly amount (you will need a renter) or you will also need to pay off an equivalent amount of your unsecured creditors.

Practically speaking, cramdowns on mortgages only occur when the property value is very low.

Previously, the bankruptcy court did have the power to modify mortgages on primary residences. Congress explicitly removed this power and as of the last Bankruptcy Code revision has not reinstated it. There was legislation last year regarding reinstating this power of the court, but it was contained in a broader bill rejected by the US Senate. Currently to the best of my knowledge the legislation has not been reintroduced.

The information on this bankruptcy attorney/law firm website is for general information purposes only. Nothing on this or associated pages, documents, comments, answers, e-mails or other communications should be taken as legal advice for any individual case or situation. The information on this website is not intended to create, and reciept or viewing of this information does no constitute, an attorney-client relationship.

doanlaw.net is an informational website sponsored by Brothers Law Group LLP (dba Doan Law Group), Law Offices of Gregory J. Doan Esq APC, SN Doan APC, Michael G. Doan APC, and Shawn A. Doan APC. Each of the foregoing entities individually owns and operates its respective law practice. Each entity has been designated by the Federal Government as a qualified debt relief agency that helps folks file bankruptcy under the bankruptcy code.
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